Thursday, March 24, 2011 w w w. f i n a n c i a l e x p re s s .

c o m Reflect 9
Record caFE PARTHASARATHI SHOME
Director and Chief Executive, ICRIER

It’s a good idea to postpone the GST

Dr Parthasarathi Shome, has had an in-
tense involvement with the finance min-
istry as advisor to the minister, in the plan-
ning and roll out of the country-wide VAT.
Thetaxmaven,whohasadvisedoncritical
changesinthetaxpoliciesof ahugeswathe
of countries, including Brazil, was most
recently the chief economist at the UK gov-
ernment’srevenueandcustomsoffice(HM-
RC), before taking over as Director and
Chief Executive at Icrier. In a chat with
Subhomoy Bhattacharjee, Shome de-
scribes why he is uncomfortable with the
April 1, 2012 deadline for introducing the
GST and DTC. Excerpts:
The union cabinet has cleared the con-
stitutional amendment bill to intro-
duce GST this week. What is your take
on it?
TheBillwillalsosailthroughParliament,
I am sure, and then move on to becoming
anActsoon.Tome,however,theconcerns
of fiscal federalism and the questions of
the balance of veto power by the Centre
thatarenowbeingdebatedarelessimpor-
tant than the need to get the structure of
the GST right. The first set is important,
no doubt. However, at this point, perhaps,
even more important is the issue of the
structure of the new Act, especially, in
whatwaysweareimprovingthestructure
of VAT.
There are three or four points at which
the VAT, for instance, cascades. There is
the way in which the state VAT is calculat-
ed where the cenvat (central value added
tax) comes in at the base. There is no offset
credit for that. Similarly, the other one is
the central sales tax, which also gives no
tax credit for sales within the state. Then,
there is taxation of services, for which
there is a credit mechanism in central ex-
cisebutnotoneagainstthestate-levelVAT.
Plus, there are some non-cascading
problems too. These need to be sorted out.
The exclusion of taxation of petroleum
products from the entire VAT structure is
a major lacunae. It is not a question of tax-
ation of these products, but the chain
should have been integrated within VAT.
Asitstands,thisentireinformationchain
is now lost.
So, looking at all these structural as-
pects,onefeelstheimplementationof GST
is going in a direction quite different from
the global best practices. I feel adherence
tothosepracticesismuchmoreimportant
in the evolution from VAT to GST.
Youaresayingitwouldhavebeenbetter
to have delayed the timeline a bit more?
The major challenge is to structure a GST
thatrunsclosetointernationalstandards,
ratherthanconcentratingonthesubjectof
cessation of powers of the state govern-
ments. Mind you, those are very impor-
SHYAM
tant—for instance, the one on the central
government’s veto power on which the
states had justifiable concerns. But now I
understand they have moved away from
this, which is a very good development. I
agree these are important, but the struc-
tural issues are even more important.
The states have complained about tax
buoyancy reducing and the impact of
the Sixth Pay Commission.
I think the understanding part is a bit ex-
aggerated. But in order to arrive at the
right structure a delay might have been
better to get an improved solution. For in-
stance, ironing out the problems on petro-
leum taxation needed to be done as well as
sorting out the cascading issues. As far as
the Pay Commission issues are con-
cerned, they were always there.
The issue of whether the GST will be
worse than VAT in terms of revenue is
something that the states have bargained
on pretty well to save their revenues. I re-
member during the VAT negotiations ear-
lier, they had bargained and got R5,000
crore towards revenue loss on account of
the switchover to VAT and then for a small
drop in percentage of central sales tax
they had got another R12,000 crore. So, the
revenue fears are a bit exaggerated.
Enough deliberations have completed on
the sovereignty part and the states have
more or less come out quite okay.
What about the disquiet on the IT
preparations?
This is important. The reality of tax ad-
ministration is not as automatic as one
thinks.Therearedailycomplications,and
each state has its own IT structure, which
is often different from others. In the fi-
nance ministry, whenever one wanted to
be specific about these, I found these trou-
bles very difficult to pin down as one was
not able to get full information.
The other is a somewhat Indian trait
that we do not deconstruct the post-in-
troduction stage of a policy. Not much
has been done post-VAT and without that
we are jumping into GST. By now, a lot of
analysis should have been done. This is
unreflective of global practices. What is
the impact of VAT, the loss of revenue?
What has happened to the customer, i.e.,
the tax payer? Have business decisions
become more seamless, has resource al-
location improved? Have refunds be-
come easier to administrate, and have ze-
ro-rating of exports improved? A lot of
things can be done like statistical re-
search, probit analysis etc. All these are
usually done by countries as part of a
post-reform analysis.
Is this reluctance because many of
the institutes are state or central
government-funded?
From what I understand, enough money
comes from non-government sources as
well,sofundingisnotaproblem.Ithinkwe
stillgetawayinIndiawithoutusingstatis-
tical analysis as an intrinsic tool to form
policy.Inseveralcountries,beforemaking
a change in tax measures, these are
analysed and presented to Parliament, es-
pecially the impact on those affected.
There is nothing like that in India.
In the original DTC, MAT was based on
yourrecommendations(onassets).But
after the dilutions, how useful is it?
Many fundamental changes were made
as part of the original DTC that I worked
on at the finance ministry. I hope those
will not be allowed to peter out. But, my
fear is if you just make a presentation,
change the language but smoothen out
the fundamental changes, then a scribe
could have written it.
What about the reforms on MAT?
ItisnotwellunderstoodastohowMATsta-
bilises corporate tax revenue sources to
give a stable revenue. MAT is actually a
tool to improve corporate tax revenue
structure.If youlookatthedistributionof
corporate tax contribution by companies
in India, it is very skewed. The effective
corporate tax for small corporate firms is
the highest. Then it becomes a U-shaped
curve for bigger firms. Then there is a
small relative increase, mostly for firms
from the financial sector.
We had removed the surcharge from
thesmallerfirmstoreducetheUalittlebit.
I suppose it’s still U-shaped. So MAT at-
tempts to use a presumptive tool to
smoothen the U. If you have invested in as-
sets in the medium term, you must ensure
aminimumrateof return—a40%taxrate
on a 5 % return on assets (assumed) gives
you a 2% minimum tax rate based on your
gross assets. There are enough carry-for-
wards and carry-backwards built in to en-
sureyoualwayspay2%taxrateonyouras-
sets. Over 5-10 years, this flattens the skew
in corporate taxes.

Geopolitics in the time of upheaval REPORTER’S DIARY

As America cedes ground to new MENA governments, its reliance on India as a staunch and unwavering ally will increase
T
he political landscape of the
Middle East and North
Africa has been indelibly al-
tered in the first quarter of 2011.
The juggernaut of protests across
the region continues to topple dic-
tators and challenge the status
quo, forcing multilateral military
interventions that are simultane-
ously firming and fraying political
alliances. But aside from the obvi-
ous, what might be the long-term
ramifications of the recent events
across the Middle East and North
Africa (MENA) for the Indo-US re-
lationship, if any?
For Washington, the upshot of
the tumult is the attendant uncer-
tainty stemming from the fear of
the unknown: from the type of
democracies that will supplant dic-
tatorships, to the altered foreign
policy stance of the rejuvenated
states. The US is being forced to ad-
just—rapidly and continuously—
to emergent political fault lines in
the MENA region. This challeng-
ing and protracted adjustment will
be most pronounced in the geo-po-
litical and commercial sphere.
Over time, as America cedes con-
siderable ground, in both, to new
and existing MENA governments,
it will realise its need to rely on In-
dia as a staunch and unwavering
ally rather than a reliable partner.
The geo-political calculus of the
MENA region is being re-worked.
While current alliances seem to be
holding up tenuously, the US is
keenly aware that its influence in
the region is diminishing (the
abandoning of Mubarak and Saleh
are a testament). Even entrenched
rulers—nonplussed by the pace of
change—are keen to maintain the
status quo for now, but recognise
that a significant recalibration in
the balance of power is in the off-
ing. In North Africa, political re-
calibrations will be prorogued, as
newly minted governments turn
their hands to stimulating growth
and rooting out corruption. In
sharp contrast, in the Gulf, the re-
calibration is well under way.
So, how might changes in for-
eign policy play out? For one,
Egypt’s newly elected government
might annul its 1979 peace accord
with Israel, distancing itself from
the US, and weakening the US’s
hand. In a similar vein, Jordan
might be forced to accommodate
its population’s economic and po-
litical will and lean more decidedly
towards the Palestinian cause. In
the Gulf, rulers, though united
with the US in their mutual dis-
trust of Iran, might begin to view
America as a fickle bedfellow and
be less amenable to its requests for
cooperation on, for instance, oil
production and Palestinian state-
JEHAN
PANTHAKI
hood. Evidence of this estrange-
ment came to the fore when the
GCC, led by Saudi Arabia, extend-
ed military support to the Bahrai-
ni government. America, undoubt-
edly, would have preferred an
alternate course of action. An ex-
treme scenario from a security
standpoint might even involve the
gradual dismantling of America’s
military and naval bases in the
Middle East, with Gulf countries
creating the capability to patrol
the Persian Gulf themselves.
As these changes manifest
themselves, the US will realise that
it could be on thin ice across vari-
ous countries in MENA. This jig-
saw of realisations will be exacer-
bated by the fact that the US has no
meaningful alliances in Central
Africa and Central Asia, and dete-
riorating relations with
Afghanistan and Pakistan. As a re-
sult, America will jointly re-think
its MENA and South Asia geo-po-
litical dynamic; a re-think similar
in magnitude to the one conducted
at the end of the Cold War. A highly
probable outcome of this review is
that the US will view India—demo-
cratic, secular, stable, and non-
aligned—through a new prism.
Undoubtedly, America will seek to
strengthen this already firming al-
liance by gratuitously volunteer-
ing to wholeheartedly support In-
dia’s ambition to be recognised as a
global player. This appeasement
could manifest itself as persistent
lobbying and endorsement of In-
dia’s desire for a permanent Secu-
rity Council seat at the UN (though
India’s recent abstention on a vote
for multilateral military action
against Gaddafi is disconcerting),
or regionally, it might translate as
more vociferous US support in
favour of India with respect to its
border disputes, and enhanced co-
operation and intelligence-shar-
ing amongst security forces of
both countries.
The commercial impact of the
recent developments will be dictat-
ed by the net impact of two oppos-
ing forces. On the one hand, newly
formed nationalist governments
might sever economic ties with the
US and other Western powers but
this is unlikely. Even if this were to
occur, and as long as it pertained to
non-oil exports, it would only hurt
the US marginally. A more realistic
scenario is that the new govern-
ments commit to broader engage-
mentwiththeUSastheyseektofos-
ter growth and, in the case of
Africa, alleviate poverty. However,
while ostensibly committing to
free trade, heavy weights of the re-
gion such as Egypt and Saudi Ara-
bia might covertly decide to shut
out the US from lucrative mega-
dealsinaerospaceanddefence,and
large-scaleinfrastructureprojects.
Spurned by these trading part-
ners in the MENA region, America
will seek broad, stable and growing
markets with cash-rich customers
elsewhere. India will be a top con-
tender—a stable democracy that
provides a counterweight to Chi-
na’s military and commercial as-
cendancy. As a result, America will
seek to accelerate and cement its
status as a favoured trading part-
ner with India, extending concilia-
tory gestures such as rolling back
restrictions on Indians seeking US
work visas and lifting restrictions
on US companies outsourcing
work to India. It will start lobbying,
more intensively, for a secure
foothold in India’s burgeoning nu-
clear, defence and aerospace sec-
tor, and in infrastructure.
While not obvious or immedi-
ate, this change will occur.
The author specialises in manage-
ment and policy issues
Files, dusters &
disinvestment
OFFICIALS in the de-
partment of telecommu-
nicationsquipinrelaxed
conversations with re-
porters that they will
soon be experts in han-
dling archival matters of
the government rather
than telecom! In effect,
ANANDITA that’s what most of them
have been doing over the
SINGH last five months since
MANKOTIA Kapil Sibal took charge
as the telecom minister.
First, they had to dust off old files to service the
onemanShivrajPatilcommittee,whichSibalhad
constituted to look into all spectrum allocations
since 2001. Now, they have to do a similar exercise
onpapersrelatingtothedisinvestmentof thetele-
comPSUVSNLin2002.Atleast Patilhadaluxuri-
ous six weeks to complete his work; Additional
secretary SR Rao has barely 15 days!
Officials were a bit perplexed to see the minis-
ter’s order dated March 15 asking for an inquiry
intotheVSNLdisinvestmentasitwasnothighon
their agenda. They got the answer by the week-
end, when they saw the cover of Outlook, which
ran a story on the alleged favours shown by for-
mer disinvestment and telecom minister Arun
Shourie to the Tatas, who acquired the company.
Didtheministerknowthatsuchastorywasgoing
tocome?Orwasitamerecoincidence?Theydon’t
have the answers and, even if they do, they pre-
tend not to know anything.
The officials, who had been working extra
hoursdailyandalsocomingtoofficeonweekends

Sibal’s reforms spell chaos when the Patil committee was at work, are now
once again set to repeat their performance. With
the March 31 deadline for Rao barely a week away,
officialsof TataCommunications(earlierVSNL)

T
he last two years have seen a
string of reforms being un-
leashed by education minis-
ter Kapil Sibal, especially in the
higher education space. Sibal has
made an attempt to open up the sec-
tor to foreign players and set up an
all encompassing, overarching
body called the National Commis-
sion for Higher Education and Re-
search (NCHER). This body will
subsume all other regulatory bod-
ies like the University Grants Com-
mission and the All India Council
of Technical Education, among
others.
Theministerwantsthegrossen-
rolment in higher education to be
doubled to at least 30% by the end of
2020, which in real terms means
tripling of enrolments in the ter-
tiary sector from around 13 million
to 40 million. But Sibal’s overambi-
tious reforms seem to have created
a confusion in the sector. Why are
the various regulatory bodies be-
inggivenmoreteethwhentheywill
be subsumed by the NCHER even-
tually? The NCHER is intended to
remove the overlaps among vari-
ous regulatory bodies. So, if the
overlaps are known, then why can
they not be removed right away?
Sibal’s ministry has started reg-
ulating management education by
keeping a tab on their admissions,
KIRTIKA
SUNEJA
fees and curriculum of post gradu-
ate diploma in management pro-
grammes. In fact, business schools
allege that this is Sibal’s ploy to cre-
ate space for foreign universities
and give them a clear field to set
shop. Similarly, what is the point of
inviting foreign education
providers if the Ivy League is not
willingtosetupcampusesinIndia?
Though it is commendable that
Sibal has looked at the ignored dis-
tance learning space where he in-
tends to set up an apex regulator
and has looked at the deemed uni-
versities with a go-slow approach,
these measures may discourage
new full-fledged varsities to come
up. Moreover, education is a not-
for-profit sector in the country.
How does Sibal expect foreign edu-
cation providers to come and offer
services here?
The man in a hurry (as he is of-
ten called) will have to take baby
steps, otherwise these sparks of re-
forms in higher education may end
up the same way as his flagship
Right to Education, wherein only
60%of the13,000schoolssatisfythe
infrastructure norms specified by
the RTE. However, more than half
of these schools will need more
teachers and a third will need more
classrooms,accordingtotheAnnu-
al Status of Education Report,
ASER 2010.
Sibal says he will enact all the re-
forms on his agenda before June
this year, but what about the imple-
mentation of that agenda? What’s
next once the agenda is ticked off ?
It will be a long bumpy ride to re-
form in the education sector de-
spite your quick steps, Mr Sibal.
will also have to start dusting their old papers, let-
ters and files.
ItisunlikelythatRaowillcallShourietotellhis
sideof thestorybuttheformerjournalist-turned-
ministerhasalreadybrusheduphismemoryand
pulled out the relevant papers to put up his de-
fence. On Tuesday, all major journalists were ade-
quately given a refresher course on the VSNL dis-
investment issue—how it was done and how
impeccable the homework was in this regard.
Even as Shourie trains his guns on the UPA
governmentfordelayingthedemergerof thesur-
plus land of VSNL, DoT officials have suddenly
gonesilent.Itisdifficulttogetawordfromanyone
there as, understandably, strict gag orders have
been issued. One could not get a word even from
the additional secretary conducting the inquiry.